We Study Billionaires - The Investor’s Podcast Network - BTC168: Bitcoin Discreet Log Contracts DLC on LN Markets w/ Romain Rouphael (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I have a fascinating topic. We're talking about derivatives on layer two Bitcoin Lightning, and not only that, but we're talking about how discrete log contracts or DLCs are now enabling two counterparties to need no intermediary to develop their contract terms. This was a topic that we covered way back in 2020, and back then it was more of a theoretical concept with nothing being fully built or put into practice. Fast forward to today,

Starting point is 00:00:33 L& Markets has just recently rolled out this capability, and they've done it on the lightning-only derivatives exchange that's doing 400 million in volume per month. An important disclosure to the listener, I was an advisor to Ego Death Capital when they made an investment into LM markets, so I'm obviously an interested party in their success, and I think that that's an important highlight as you're listening through this. But with that said, and as you'll see in this interview, the software for engineering and new applications being built on top of the Bitcoin Lightning Network are somewhat mind-blowing and definitely noteworthy for anybody building in this space. So with that, here's my interview with Romaine Raphael from Allen Markets.

Starting point is 00:01:15 Celebrating 10 years, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey everyone, welcome to the show. I'm here with Romaine. man, I'm excited. This conversation is so long overdue because we've been chatting on Twitter for years at this point. Welcome to the show. Thrilled to do this. Thanks a lot for having me, Boston. It's a pleasure to be here. It's crazy to me because I remember people on Twitter first highlighting like, whoa, look at what these guys are doing on Lightning. And they've got a derivatives exchange happening on Lightning right now.

Starting point is 00:02:06 And I just remember saying, wow, I need to learn more about this. And as things usually go, I get lost on tangents and whatever. And then in the background, you guys go from doing thousands of dollars in buying power or volume on your exchange to what was the last 30 days for you guys as far as volumes go, roughly. on Lennon markets we did $450 million volume in general in the last 30 days

Starting point is 00:02:38 or just this month yeah yeah just this month in general 350 million dollars in buying power volume 450 million 400 volume

Starting point is 00:02:50 4150 million yeah no we've had some huge gross lately very happy about it these numbers are crazy that's crazy Crazy. $450 million in buying power in January 2024 alone on Lightning, right? Yes, yes.

Starting point is 00:03:09 I'm trading volume. Yeah. And yeah, I'm really excited to be here and speak with you, Preston, because I remember back in the days when we just launched a land markets, you did this tweet. Basically, you quote tweeted our first original tweets, our hello world tweet, saying, hey, we are the guests from Mellon markets. we're alive. You can do instant trading on lightning.

Starting point is 00:03:32 And you quoted this saying like, hey, this looks cool. Have you tried it? And then we had this, like it was our first Twitter storm. Like so many answers, so many people reaching out. Like, yeah, I know this guy down screws. And it was really exciting. And we had this crazy weekend in which we had a record number and sign up and volume. So thanks a lot for shedding on us.

Starting point is 00:03:56 You guys did all the work, man. I just, it's amazing. What's fascinating to me is that it's happening on lightning. But before we get to all of that, I just, I want to rewind a little bit. And I want to first kind of introduce you and your background and get into this. So what events in your life led you up to creating a derivatives exchange on top of lightning? Like what preceded all of this? You know, it's a question that a lot of people ask.

Starting point is 00:04:22 And I think for all four people working in Bitcoin or in the Bitcoin industry, so people, a lot of people ask over. dinner, you know, why do you do that? Or what led you to that? Now, I mean, it's a question that I like. I was not head designed to work in this field at all. I have a business background first. So I'm not an engineer, which I always say it's important to say because a lot of people can be frightened about working in Bitcoin or working in the space because they think it's highly technical, et cetera. Well, you don't need to be an engineer. You don't need to be a developer to be in the space and to build in the space. And I think it's very important to say this. So I would, I would,

Starting point is 00:04:59 I was working in the financial industry. I was working in investment banks, doing trading on commodities, in London, in France. And then I moved to Hong Kong. And while I was working in Hong Kong, I was reading a bit. It was 2012, 2013, and I was reading a bit about Bitcoin on Bloomberg. And it seemed like complete nonsense to me. Like I didn't understand anything about it. You read these articles about this anonymous currency created by somebody, nobody knows.

Starting point is 00:05:29 Tatushin Akamoto and you've got this money which is run by computers doing complex computation without central bank. It basically didn't make a lot of sense to me until in the street I was living in in Hong Kong opened a shop with a big Bitcoin sign and in fact it was a Bitcoin ATM. And I just went to check it out of curiosity. And when I realized what you could do, I was mesmerized because I realized that you could go there. You had Hong Kong dollar. You could could change them to BTC and them, and then you could send Bitcoin all over the world. Anywhere. Anywhere within 10 minutes, and nobody could prevent you from doing that.

Starting point is 00:06:10 And if you sent 100 bucks, then your counterparty was going to receive, let's say, 99.5. And I was amazed about it because when I was living in Hong Kong, I'm from France. I'm French. Maybe you noticed by the accent. Whenever I wanted to send money to my family, to my brothers, for example, in France, it was a nightmare because it took several days as the sheaths were really high, it was a really, really bad user experience. And then with Bitcoin, I had this tool in which I could very quickly and efficiently

Starting point is 00:06:45 change the local currency to Bitcoin and send it away. Then I, you know, I shook that. I was like, okay, so it works. It works for real. And now I need to understand how it works. And especially when you work in the vanging industry, and you're used to all the very old plumbing, like switch payments, et cetera, blah, blah, blah.

Starting point is 00:07:03 Payments take time. It's very complex, et cetera. And now you get this software, which is developed open source, and you get this network peer-to-peer, everybody can connect, everybody can log in, everybody can make payments. And it really seemed like the future, like the future of what payments and of what finance should be. So I paid more and more attention to it.

Starting point is 00:07:27 And a couple of years later, so we discussed it with friends, et cetera. And I came back to France in 2015. And then I was like, okay, now I need to, I wanted to launch my own business. I wanted to be an entrepreneur. And I was like, I need to be in this field because it's too interesting. It's at the intersection of economics, you know, finance, of technology, of the hiking world. you've got a bit of politics, a bit of sociology in it. So it's too fascinating to miss it.

Starting point is 00:07:57 So I want to be in it. And we had this discussion with our co-founders, so with my co-founder's com and Victor. And we're like, we want to be part of it. We don't know yet what we're going to do, but we want to be a part of it. So what we did remain. People need to know that 2015,

Starting point is 00:08:15 when you were having these discussions with your co-founders, lightning was a dream at this point. It was just something that people were hypothetically thinking could potentially work for the scalability on the second layer. Back then, when you guys were talking, what was kind of the early ideas? I'm assuming it wasn't a lightning derivatives exchange. No, no, no, it was the only day. And I remember, I think in 2016, you had the first talks by Joseph Poon speaking about what could be lightning and maybe the first version of the white paper. but it was really only...

Starting point is 00:08:50 No, so it was before Lightning, we were very interested in Bitcoin, the object, and we had this idea that it was to see that it's very hard to define Bitcoin, but that it was two things at the same time, that there were two main angles to Bitcoin. One is the asset,

Starting point is 00:09:07 okay, Bitcoin and asset, we talk a lot about it these days with the ETF, etc. Bitcoin store value. For some people. Yeah, store value, digital gold, etc. And then, you get Bitcoin, the protocol, Bitcoin, the programmable money, the financial architecture on which you can try to build financial services. At the beginning, we didn't really know which route

Starting point is 00:09:31 to explore. And we first started exploring Bitcoin, the asset. So basically, we did some consulting, some research, some development around Bitcoin, and we managed the fund invested in Bitcoin. Okay. And so basically, more focusing on Bitcoin, the asset, managing this fund. And doing that, we realized firsthand how stressful it could be to manage Bitcoin funds, like to move Bitcoin firms in and out, you know, from an exchange. Because even today, you know, it's a very stressful experience sometimes to do a Bitcoin transaction to see it on the blockchain, to follow to make sure it's confirmed. Plus it can take time.

Starting point is 00:10:09 The fees can be high. So it was always quite stressful, you know, to manage Bitcoin. And at the same time, in 2017, 18, then the Lightning Network started to emerge and mature. And thanks to the Lightning Network, so this layer on top of Bitcoin, what the Lightning Network has enabled is the ability to do instant payments. So you can instantly do payments on Bitcoin in a scaleable manner, again at a very, very low cost.

Starting point is 00:10:41 So when we first saw Lightning, we're like, okay, this is the future of Bitcoin. because Bitcoin is supposed to be the moor the Internet that you can exchange online. And now, you know, we have this protocol, lightning, which enables us to move money anywhere in the world very fast. And we were still, you know, like building a couple of stuff on Bitcoin. And we had this idea. I think we were one of the first maybe with Blockree, Blockstream. We opened an online shop with payments on Bitcoin.

Starting point is 00:11:12 So basically we sold Bitcoin socks. Okay, we produce in Bitcoin. that we sold on Lightning. And we had people purchasing it from all over the world, and you had a guy from Australia who purchase socks, and we saw like the money flowing almost instantly, and it was, you get like this magical feeling, you know, when you do this lighting transaction,

Starting point is 00:11:32 and you see in fact that you can transfer money without taking any counterparty risk in a very efficient manner, such as with Lightning. And, you know, it got us thinking, yeah, lightning is very, very useful for payments for sure, but we could also use it for $20. We could leverage this technology not only for payments, but also for collateral payment. And that's how we decided, you know, to build

Starting point is 00:12:01 the first derivative exchange on the Lightning Network. Unbelievable. So for the audience, I would assume most know what a derivative is. But there's probably a lot listening that they've heard the term a ton of times, but at its core, they don't necessarily know exactly what is a derivative. So let's define that. And then let's start going into more details of like the actual utility beyond the speculative way to lever Bitcoin's price action, which is not what we're promoting by any shape of the imagination. There's real utility in derivatives. Explain what a derivative is, and then let's talk about some of the real-world use cases of a derivative.

Starting point is 00:12:46 So basically, a derivative is a contract. It's a contract whose value depend on the value of an underlying asset at a future time. Okay. So it's a very old concept. You are the first forward contracts on olive oil in antique Greece or even on rice in old Japan. In order, so this was a complex sentence, a contract whose value depends on an underlying. So let's take a very concrete example. Let's say, Preston, you are the treasurer at American Airlines, okay, at an airline company. So you are treasurer, so your role is to manage the cash of the company. And people book their fly.

Starting point is 00:13:31 When they book their flights, they pay today. So let's take the example of a flight, which is due in three months. Tickets are sold today. plane is full. It's good. You have the cash, people pay. Now, what is your risk as a treasurer? Well, there are potential risks, but let's say the main risk is the price of gasoline, which we know is volatile and the current climate, it can go up, it can go down. You don't know, but if you are a careful treasurer, you would need to hedge that potential risk. Let's say tickets are sold today. Today, a barrel of crude oil is at $75 US.

Starting point is 00:14:12 Basically, you have two options as a treasurer. Either you do nothing or you try to hedge. Let's say you do nothing. You are a lazy treasurer. You do nothing. It's a bit risky. Now, in three months, the price of a barrel of crude oil is at $60. People will congratulate you and question.

Starting point is 00:14:32 It was a bit risky, but in fact, okay, we can buy 60. we would have bought 75. Now in three months, the price is at $100. Then people will yell at you and tell you, Preston, you should have never done this. You should have hedged this. Of course, the price was going to go up. So you should have hedge this risk.

Starting point is 00:14:54 Now, how can you hedge? Well, you can physically buy oil today at 75. You can do that and you store crude oil. But, you know, it's not really your job as a treasurer to store crude oil at your office. Usually, that's why derivatives contract exists. What you could do is

Starting point is 00:15:15 there are two main types of derivatives contract. We say there are forward and option. Let's see the first type of contract, which is a forward contract. You could say, okay, I want to lock today the price is $75 US dollar per barrel. I want to love this price. So you're

Starting point is 00:15:31 going to buy a forward contract. You're going to lock the price of a barrel at at 75 per barrel. So let's say within three months, the price is at 90. You pay 75. Your trade, everyone is happy in your team. Now in three months, the price is at 50. Well, you still have to pay 75.

Starting point is 00:15:51 But at least, and you are not reckless. You know, you hedge this risk. So that is what forward contracts are. It's a firm commitment to buy something at a future date at a given price. This is the first big type of derivative. It's forward and future. Forward our OTC contract, meaning it's two counterparty, leading them together. Futures are we say listed contracts.

Starting point is 00:16:16 They are listed on an exchange. For example, on CME, you have listed future contracts on Bitcoin. Forward future, it's a firm commitment. And then there is options. Options, nowadays they are more mainstream in a way because Robin Hood made it very easy for people to trade options, but they are much more complex product. With option, what you could do is instead of locking the price at $75 per barrel, you could say, I want to buy the right to buy the barrel at a future date at 75.

Starting point is 00:16:55 I want to buy the right, meaning that I have the right to buy it at 75, But if it's below, I don't buy it. It's a different product. You don't have this linear payoff. So you have to pay a premium to buy this option. So it's called the option premium. You have to buy it at home. So let's say it costs you $10.

Starting point is 00:17:16 You pay $10 U.S. dollar today. And then you have the option to buy it in three months at 75. So if it's way above, if it's 100, 120, do we exercise the option? you will buy at $75 plus the $10 of the premium. So we buy at 85. If it's below 60, 50, you will not exercise the option. You will buy in the market at 55 plus the option 65, for example.

Starting point is 00:17:46 So this is the hedging use case for derivative. Now there are also speculation and arbitrage. It's hard to say in the world of derivative, which is the most popular use case. I would assume that in terms of volume, it's mostly speculation, like Bitcoin derivatives for example, but there is also, and always, people who use derivative for hedging, and that's why they were invented. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

Starting point is 00:18:27 and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policy makers, the kind of people you don't just listen to but end up having dinner with.

Starting point is 00:19:17 Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereigns. diversity, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedomforum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately.

Starting point is 00:19:59 How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence.

Starting point is 00:20:34 And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide demystifying AI at net suite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something

Starting point is 00:21:15 from scratch can feel exciting, but also incredibly overwhelming and lonely. That's the That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify

Starting point is 00:21:48 is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show.

Starting point is 00:22:24 At the core of what you just described, we're thinking about a business. And I love the example you gave with the airline industry because I think it's, you could go into farming, you could go into many different things. But at the core, when you deconstruct, who needs these products, it's somebody that has a large exposure to some type of raw commodity that's very volatile. or some type of input to their product or their service in the airline industry. Obviously, the fuel is an enormous part of their expense structure. And those fuel prices are extremely volatile.

Starting point is 00:23:02 And like you point out, that person who's managing the expense structure of the ticket prices to actually the plane flying three months later. And that's another core component here is you have people buying something that they're not actually realizing for three months later or even a year later in some cases, people buying tickets way out there. And so those components, they have to hedge this. And then whatever that cost is to hedge, they're then going to build that into the price of the tickets that they're selling because they're not going to assume that cost. They're just going to push it to the consumers. And so that's the real live utility. I think derivatives get a very bad name because

Starting point is 00:23:42 there's so much speculation that happens in derivatives that sometimes it's lost on a person learning about them or seeing them that there really is real world utility for a derivatives product. But on the counterparty, there's literally professional speculators that are taking oftentimes the other side of these traits. And that's what in the news is often focused upon, right? No, definitely. And even in the Bitcoin industry, you know, if you take the example of miners, for example, which is also an industry in which you are heavily dependent on the price of something volatile, which is Bitcoin, because your revenues are in Bitcoin and your spending and your costs, they are in US dollar, they are in Euro, they are in Iran. Okay, so basically you are

Starting point is 00:24:33 structurally long BTC and short U.S.D. And sometimes as a business, okay, operator, it can be risky. Yes. I mean, I love the age to be always long. But, you know, you're in a business. You have to pay salaries. So if you have expectation that there's going to be a steep decrease in BTC price, it makes a lot of sense to be able, for example, to short BTC,

Starting point is 00:24:59 shorting meaning like selling a future contract or a short contract on BTC, USD price. And in this case, you will make money with BTC, U.S.D decrease. which we compensate the loss that you really nurture on your regular business. So I love this use case because you took what is very easy to kind of understand from a physical commodity standpoint. And I think when we go into Bitcoin, people might be looking at it and saying, oh, this is just an enormous amount of speculation. We're not talking about fuel going in an airplane anymore. But what we are talking about, as you so eloquently highlight here, is real energy costs that miners are having to deal with and fiat denominated dollar, euro, whatever the denomination is,

Starting point is 00:25:47 a bill to pay for these expenses to run these mining rigs. When we think about miners that would probably need to use a derivatives product the most, I would think that it would be miners that have very high energy costs and miners that have maybe a lot of variability in their grid. Now, I know some of them kind of lock in a fixed rate for a certain period of time, so maybe that doesn't necessarily apply the variance on the grid. But I'm curious if there's any other variables or situations or maybe anything other than mining that you see derivatives for Bitcoin being something important to consider. Yeah, I think it's probably a product that will emerge is a product linked to block space, I think,

Starting point is 00:26:34 because a lot of business and to be more and more sensitive to transaction fees, it can be exchanged when they need to validate transaction. Or if we take the example of Lightning, there's a specific new space, which is going to be as interesting as the network grows. So in Lightning, whoever opens a demand channel is to, close the channel, needs to be the one closing the channel, and needs to be the one sending as a channel close your transaction. And in this case, you are exposed to the evolution of transaction fees, and you may want to hedge, you know, that potential risk that you have.

Starting point is 00:27:14 Today, it's something that is not hedged by market participants, but as coin and lightning takeoff, I guess it's going to be a risk that's going to have to be hedged by market participant. I love this point. I just want to explain to people that maybe on the technical side aren't intimately familiar with what we're talking about here. So I run my own node. I open channels to other nodes on Lightning Network, which is effectively like an abacus. So for Remain had a, had a node, and I wanted to open a 10 million SAT channel to Romaine. Those SATs start out on my side. And as we continue to exercise this channel between each other on layer two, maybe at the end of four months, there's five million SATs on Remain side.

Starting point is 00:28:02 There's five million stats on my side, and we want to close the channel. Well, we have to go back to layer one to close this channel between the two of us. So now we're exposed to on-chain Bitcoin fees to close out this channel. And we were also exposed to this when we opened the channel on layer one, but we knew exactly what those costs were when we opened the channel. But when we go to close this channel, the fees could be like they are right now, around 30 sats per VB. But you go back to three weeks ago, they were 100 SATs per VB, which were three times higher than they are right now. So if we would have had to have closed out that channel and we're dealing with fees that are three times higher three weeks ago than they are right now, and you have to think, okay, so this is not a large channel.

Starting point is 00:28:49 it's just these two people, but put yourselves in the shoes of, call it like a wallet of Satoshi or one of these really large lightning service providers that are managing, call it tens of thousands of channels or whatever it is. I know River has a ton of channel management as well. If they are making economic calculations on the fees, the routing fees that they're going to collect by keeping these channels open and the channels get pegged out on the other side and they want to close it and basically reopen another channel, that math of the layer one settlement to close out that channel is going to be a huge consideration on opening yet another channel and just whether I just keep the existing channel open and the fees that I would collect through something that's

Starting point is 00:29:39 kind of pegged out in the opposite direction of that channel. This is something personally, I think this is huge, what you're talking about here. And beyond the, because I think everybody kind of migrates to derivatives really being applicable to mining and not really thinking beyond that. But when we think about, and there's been, we've covered this a lot on the show as far as the layer two lightning network becoming the new risk-free rate. And when I look at this and I look at what you guys are doing by providing a derivatives exchange around this and looking at the fees that are being collected by people that are opening and closing these channels.

Starting point is 00:30:18 I think this is great. This is huge. This is a massive use case that is only going to further solidify kind of what the going rate is for fees on layer two. It just strengthens it in a way that I know I personally wasn't expecting until kind of hearing this talking point. This is crazy. Anything else that you're seeing beyond that point?

Starting point is 00:30:39 That is mind-blowing. We certainly believe that there's going to be more and more Bitcoin native product. whether it's linked to, you know, hash rate, hash price, transaction is like block space. I see that the nearest use case we see and actually doing a product on block space is something we are very interested in. And I'm sure this will lead to other ideas and other needs

Starting point is 00:31:04 that, you know, we don't really see right now. All right. You guys have a big announcement. Discrete log contracts, DLCs. This one, we covered this. on our show, oh boy, I don't know, two years ago. And it was like just being discovered as a thing to do. And I really haven't seen anything actually built on this. And it might be my own neglect of knowing who's doing it and who's not. But you guys at Allen markets are rolling out discrete

Starting point is 00:31:37 log contracts. Describe what this is. This gets very technical, very quickly, but as generically as possible so that people can kind of understand the general overview. What is a discrete log contract or a DLC? Just before that, maybe, I'd just like to see that, you know, our goal is to build the future of finance on Bitcoin. And we think Bitcoin as an infrastructure is the best infrastructure we can leverage to be innovative financial services. And in a way, you know, when I talk to you about how painful, you know, the relationship with the exchange, was there was a problem that luckily we were not exposed to, but which is an even much bigger problem, which is that often, and it's still the case, heading in custody upon at the same place

Starting point is 00:32:27 within exchanges, whether it's thought or derivatives. And we've seen throughout the history of Bitcoin, to quote Satuji, that, you know, trusted third parties are security rules. well, they continue to be security roles since the M-Gox and during the crypto contention of 2022, we've had all these bankruptcy, all these failures. And in a way, you know, thanks to Satoshi Nakamoto, we fixed money that we didn't fix trading yet, you know, because trading is still centralized at trusted third parties with trading and custody, which happened at the same place, which is, of course, highly insecure, highly dangerous.

Starting point is 00:33:12 That's the main issue that we wanted to tackle with Zelen markets since we start, and we wanted to really own Bitcoin because we think it's the best collateral. So we started with the land markets, and with the land markets, we had this idea that they could leverage the Lightning Network for instant settlement. And if you have instant settlement, you can move money in and out very quickly from your wallet to the exchange, back and force. And in a way, you can reduce the time that you are at risk. You mentioned this abacus on lightning.

Starting point is 00:33:46 Well, you can, on N& Martyr, we made it very easy to move money just when you want to trade and to get friends back to your wallet just after your trade is closed. So basically, you still are critical parties, but only while the position is open. And you can move money and we think that the big value proposition of Bitcoin, and we've seen our volumes skyrocketing since 2022. And I guess this has a lot to do with, sadly, people realizing that, you know, trusted sub-parties are dangerous and that we need to build more non-custodial trading. That's what we've done with the land market. It's for retail. Now, we've always been following VLC. And now I could see your question.

Starting point is 00:34:31 Before you go there, I just want to highlight a really core thing that was very indirectly said in what you just pointed out. LM Markets was founded in 2019. Is that correct? Yes. 2019. Think about all the explosions that happened because of counterparty risk in this past cycle, whether it was FTX, you name it. Anybody that was providing a custody service in this. space was, for all intensive purposes, exploded through this debacle that happened on this

Starting point is 00:35:08 last cycle. You guys have been around through that entire period of time with no issues whatsoever. And I think that that is beyond commendable considering your derivatives exchange. All right, let's talk about DLCs. Good luck describing this. So, thanks a lot for the game world. We do not. yield, we don't have a token. So we really focused on risk management and on having something secure. So happy with our journey so far. And now back to DLCs. We've paid attention to DLCs from the start because they share a lot of similarities with the Lightning Network. So they were invented in a way by the same MIT researcher, which is Tadeus Dijja, which is a co-bo-sor of the Lightning

Starting point is 00:36:00 network white paper and who designed DLCs. DLCs are native smart contracts on Bitcoin, tied to the publication of a data feed, a price provided by an Oracle. So now we're quite familiar with smart contracts in the crypto world and the whole, in other blockchain, etc. DLCs are smart contract that makes a Bitcoin way, meaning they are secure and fully secure. The Wight Paper, the JLC White Paper, was returned in 2019, I guess. It's been around for a long time. There hasn't been really so far in an application and an app taking off around DLC.

Starting point is 00:36:47 And in a way, we think our view is that it's a matter of use case. It's a matter of how you build a product which is easy enough, which is as simple to use as possible to make it a success. In a way, that's what we've tried to do with LN Market, which became a very popular application on Lightning. We pioneered some protocols like LNU errors that you could use for instant authentication, for instant payment, a lot of stuff that made it very simple,

Starting point is 00:37:19 very easy to create an account and trade. And what we think we realized with LN Markets, we want to do the same thing with DLC. So for now, people have thought that it's, you know, it's complex, it's hard to manage, hard to deal with. We want to build a very simple user experience around DLCs. And what we want to build is a new kind of trading platform, a trustless trading platform built natively on Bitcoin.

Starting point is 00:37:46 So basically a platform on which people can trade derivatives without taking any counterparty risk and ensuring that trading and custody are not. weeks, never. So that's what we want to view. And just a quick note because we mentioned derivatives. Why we decided to do derivatives in the first place is because being derivatives, it can be, is there physically or cash settled? You remember when we talked about the treasurer of American Airlines who needed to hedge its exposure to the barrel of oil? Well, he can enter into The derivatives contract, which are physically settled or cash settled. Well, you physically settle, you mean taking delivery of the parallel

Starting point is 00:38:34 of rights. Usually it's not physically settled. It's mostly cash settled. You just get the difference in price. Well, with derivatives, there are contracts and Bitcoin derivatives, like future and options when we do on the end market, they can be settled in PCC. And that's extremely important because when we launched at land markets, on lightning, you could and you still can

Starting point is 00:38:57 and the way only trade Bitcoin. It's the only value, it's the only token that you can exchange. So initially made a lot of sense to build a very latest platform because Bitcoin is the native unit that you exchange at the end of the product.

Starting point is 00:39:13 It's the same today for DLCs. These smart contracts on Bitcoin, they can only be traded and settled in Bitcoin, in BTC. And the platform, within the LC markets, the platform that we build, we are thinking about different kind of products.

Starting point is 00:39:30 First, it's a, and it's an important distinction, it's a platform which is for institutions. LN Markets is a platform that was designed for retail clients. We build a platform for institutions. And we think it makes much more sense for institutions to use DLCs. Why? Because we introduce a novel approach to DLCs. So now let's go back to DLCs.

Starting point is 00:39:53 In a way, they are quite similar to, the way they work is quite similar to the Lightning Network. In the Lightning Network, you know, people before opening a channel, they exchange, various signatures before they open a channel, and then they can use this channel to make a lot of payments between themselves. With DLCs, what my, DLCs are a kind of one-time payment channel. What DLCs are, if during me, Preston, me we open a dLC together. What we're going to do with? We're going to lock in the Bitcoin blockchain. We're going to do a multi-sick transaction. We're going to lock

Starting point is 00:40:31 in the Bitcoin blockchain. And the release of the fund will be tied to the publication of a price by an or a curve from the real world. And let's say we do a product, we do a future product, for example, which is tied to BTC, B.TG, well, there will be an oracle, which could be an exchange, which could be coinbase, which could be whatever, which we test. try the price of BTCUSD. And upon publication of the price by an RACTA like Coinbase, at the expiry of the product, automatically, each of us will receive our respective payoff.

Starting point is 00:41:08 So let's say you are long Bitcoin, I am short Bitcoin, and the price of Bitcoin goes in. Well, at the end of the product, the Orak-in will feed some data, to the smart contract, and you will get the positive PNN of the product. And all this will be done automatically without any action from our side. So with DGLC, we can do some financial contracts and derivatives, products which could be linked.

Starting point is 00:41:37 So we could customize any type of product as long as there is an Oracle which publishes a price and there is a settlement which happens in PTC. Is that okay for now? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

Starting point is 00:42:10 So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at Vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try?

Starting point is 00:42:54 The futures market is more active now than ever before, and Plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right for from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just

Starting point is 00:43:29 two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus 500, to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than

Starting point is 00:44:20 $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund's prospectus at fundrise.com slash income. This is a paid advertisement.

Starting point is 00:45:08 All right. back to the show. Okay, so when I'm really trying to simplify, because this gets so complicated, for the listener, when we're talking about DLCs, just this discrete log contracts, let me give a like really generic example for people to maybe in, correct me if this is not correct, but this is my understanding of it, okay? Let's say you and I were trying to make a prediction on, and we were placing a bet, a $10 bet on whether it was going to rain on Friday of this coming week, right? We both take our $10. We stick it in a box. The box is then locked. And then Friday comes and according to and the terms of our reference, right, we're going to say if this website or these three websites, all three say it's going to rain on Friday and it says it literally prints rain on their website.

Starting point is 00:46:03 then on Friday this box will automatically unlock and the funds will be distributed to whoever was taking the side that yes, it's going to rain on Friday. And all of this is done through mathematics and encryption. I think for anybody, is that a pretty good overview? Pretty good. Pretty good. Okay. Okay. So one of the things that you guys talk about in your white paper that I've reviewed is this idea of a central, like what was the term for?

Starting point is 00:46:33 coordinator. Centralized coordinator. So the centralized coordinator in this example would be the terms that we both agree to before we basically lock the $10 in the box. And then that central coordinator would then go to the three sites that we all agreed were going to be the three sites. And we agreed that it had to print rain on the site and text. But all those terms between the two of us are agreed upon prior to locking the $10 in the box. And then once we agree on these terms, we basically both put the funds into an escrow, into the box, and then the code will execute the rest from that point forward, correct? Yes, yes, correct.

Starting point is 00:47:16 I think you mentioned a lot of very interesting points about DLC. First, it's that in a way it's, that's why also it's called discrete log contract. It's because the Oracle doesn't even need to know that there is a smart contract, that there is, you know, like a DLC between you and me. The Oracle just certifies prices, you know, like let's say every minute, every 10 minutes, certifies some piece of data, but doesn't know who uses it, if it's being used, etc. So there are some sense of privacy that is really interesting in it. There also some sense of auditability, because when we do,

Starting point is 00:47:55 you know, this DLC, you and me, we lock friends in the Bitcoin blockchain, and each of us can look at it in the blockchain and make sure that everything goes as planned. There's this sense of programmability. Now, it's maybe one of the reason in our view why DLCs have not taken off yet. It's also because they are cumbersome to implement. And not only implement, in fact, it's hard to find a good party led. For your example, you know, it's a theoretical setup between you and me, having this opposite expectation, but, you know, in real life, it's really hard to find one peer which has the exact opposite expectation as you and who wants to enter the

Starting point is 00:48:42 LFC, who is savvy enough to do that, etc. There's a market idea, there's also a practical implementation of it. If we have to do this peer-to-peer at the LC together, well, it's a bit cumbersome to do. We have to do some back-end forms to exchange, some signatures, blah, blah, blah. Plus, so we have to stay online. It's a bit hard to implement. And that's why we produce this centralized coordinator, this coordinator, which is the service provided by us.

Starting point is 00:49:16 So the name of the platform is DLC markets. we never take custody of the chains, never, never, but we play the role of coordinator to simplify the setup of dLCs. And by having a centralized coordinator, which is always online, we make sure that it's very easy, it's just a matter of loading in your Bitcoin wallet and clicking on several buttons to sign a few transactions and boom the dFC is settled. So we ease this setup. Plus, it's a big technical.

Starting point is 00:49:51 It's in the white paper, but for people who want to listen to it, go deeper, they can go to our white paper. We solved a problem, which has flagged DLC, the language, which is a three-option dilemma. Without a coordinator, when we do this exchange of signature, there's always one of us who is the last one that needs to sign the transaction. And in a sense, I have your signature and I can wait a little bit to see if, you know,

Starting point is 00:50:23 the data from the real world goes on my side. Let's say we bet on DGC, U.S.C. You are long, I am short. At the final set of the GIC, there's always the initiator is always in a bad position, the initiator of the GMC, because they have to wait from the signature from the other party. And if the other party is non-cooperatives, they can exploit this, they can wait to see how the price we'll. Thanks to a centralized coordinator, we solved this dilemma and we make sure that there is no longer this pre-option dilemma that has flagged DLC. Plus, you know, working on them, and there's been a lot of R&D, which has been done by GEO, our in-house researcher.

Starting point is 00:51:08 we've also been able to build on the DLC protocol to replicate the life of a derivative product in the real world. So replicate, for example, marginal call, replicate liquidation, and the final settlement. Of course, all this is much doable and then is much more simple thanks to the coordinator. Now, it can get a bit technical, so all this is in our white paper. We'll definitely have a link to this in the show notes because I think anybody who's been following this space for a period of time are familiar with the Oracle problem, the Oracle dilemma. That can never, I don't think it can be ever fully mitigated, but there's ways like you're talking about this centralized coordinator as a way to de-risk it as much as possible. You talked about this, and I want to get your thoughts on that, but you also talked about this free option dilemma. to try to just maybe simplify this idea, because I think this is a really important idea that you guys are solving for.

Starting point is 00:52:11 And it's a complex, all this derivative stuff gets really complicated really fast. But this would be kind of my way and correct me again if I'm off target here. For the free option dilemma, think of it maybe from like a real estate developer's standpoint. Like you would be saying, hey, you have the option to build on this land, the cost. I would give you, remain, that option. But the whole time I'm sitting there on this plot of land, and maybe there's more businesses and stuff that are cropping up, which is making it more valuable.

Starting point is 00:52:43 And for you to buy that option, it was very minimal. But for me, the risk of maybe nobody shows up and the land maybe gets less valuable or more valuable, depending on the circumstances, gives you this free option to exercise. Because if it didn't become more valuable, you just kind of just walk away. like, oh, well, tough luck, dude, sorry. Now, there's typically a premium built into this optionality

Starting point is 00:53:08 or a cost for you to have that option you would pay whatever amount. But if it's not, if it doesn't offset my holding costs or my opportunity cost with that property during that period of time, that's kind of where this free option dilemma really kind of presents itself. And you're saying that through the in the white paper that you guys have put out on all of this, you solve this, this dilemma of providing a free option in the market. I'd probably have to dig into this a lot more to fully comprehend and understand how that's happening. But for the listener, they fully outlined it in their white paper. Yeah. And also what's good, I guess it's kind of like in market, the YonC market is going to be out really soon.

Starting point is 00:53:53 Right now we're in beta. and the best is to use it. I talk to you about how I found out about Bitcoin. You know, the white paper, Bitcoin White Paper. If I had started with the White Paper, it would have been much too complex. And I would have stopped there.

Starting point is 00:54:05 It's just using products, using stuff that you get to understand them and be more serious about them. It was this for Bitcoin. I think with LLARCHA created an experience in which is the case for Lightning. You know, it's a, you make the technology invisible in a way

Starting point is 00:54:23 you just use it because it's useful. It enables fast settlement. And with the DSC, we want to make the same. I mean, for all the tech interested people, et cetera, there is white paper. There are a lot of stuff to which they can refer to. But we think the beauty of it, and when we start, you know, doing demos to hedge fund, etc.,

Starting point is 00:54:42 the beauty of it is that you can do trust less selling on top of Bitcoin. And it's just awesome. When you look at the blockchain, when you see, you know, the product working. and actually being able to enter derivatives contract without taking any counterparty waste on Bitcoin. We are very part of it because we think it's what will help accelerate Bitcoin as an infrastructure.

Starting point is 00:55:05 I love it. One other note on the DLC stuff, correct me if I'm wrong here, but my understanding is that the only two people that actually know the terms of the contract are the two participants. Let's say somebody, going back to our example of predicting the rain, right? Like, if you see all these, if you were actually able to peer into, call it 10,000 contracts of everybody trying to predict the rain, there might be some type of market signal in knowing

Starting point is 00:55:31 the sheer volume of people placing a position on said event. And it's my understanding that that's all cryptographically protected from the other market participants from seeing what the actual terms of that contract are. Yeah, yeah, you've got privacy invader and privacy is important. when you do this kind of climate change. So, yeah, it's embedded by design, you know. And you talked about the Oracle

Starting point is 00:55:57 problem, and it's a very important and crucial topic when we talk about, you know, non-custodial trading, transless trading. It's not something, it's a very, very hard problem. It's not a problem that we pretend to solve or to tackle with our solutions. There are several ways that you can

Starting point is 00:56:17 mitigate, you know, the importance of the reliance on the Oracle. You could use different Oracle. You can do, you know, you can use a set of Oracle and do the media and exclude, you know, the higher and lower values. We also think that it's, that's why it's interesting. And so to build products tied to Bitcoin's because in a way, Bitcoin Core can be the Oracle. Like if you think about trees, for example, or block space, it's something that, you know,

Starting point is 00:56:45 that is upselling by everyone. And so you can have this kind of distributed oracle, which is, you know, the Bitcoin network itself. So it makes a lot of sense for us to build this kind of products. And it's wide on the land markets. We've been very focused on PTCUSD future for DLC markets. We are really going to focus on, you know, the Bitcoin native economy and how we can leverage derivatives to, for HedgeE in a secure way because the Oracle is Bitcoin. you just slam dunked to the me saying that the Oracle problem

Starting point is 00:57:20 I think I might have used the word never in there but you're right if you're looking at it from on chain layer one fees I guess that would be something that you wouldn't have to worry about the Oracle correct like I'm thinking through that I think you're right well of course there are some I know some technical I don't see it's as simple as it would in be a people as that, but, you know, we can, so I don't see we can fully solve it, but we can design a

Starting point is 00:57:49 scheme in which there is much less reliance on a trusted self-party as is the case. Yeah. Well, I think at the end of the day, anybody that's entering into a contract, you and I entering into a contract saying, yes, these are the terms and conditions that will release the funds, we're both agreeing to whatever that is, right? And if there's risk in one of the data sources that we're both relying on to validate the final, you know, at the time of maturity of the contract. That's on both of us to figure that out and be responsible for our decision. Yes, definitely. And I mentioned Bitcoin native product.

Starting point is 00:58:26 They'll do so. If we see more broadly on how Bitcoin can appreciate finance, in the traditional world of finance, there are a big way to trade derivatives. One is on exchange. It's what we call listed derivatives and the other one is OTISME. 22 institutions trade directly between themselves. And it's a massive, massive market. I mean, the total size of the derivatives market is like 600 trillion U.S. Do not over a year. So it's a very, very big market.

Starting point is 00:58:56 And the majority are settled OTC. So just the footstomp here, six times the size of the fixed income market, just for people to kind of wrap their head around, that number that he just said. It's six times the fixed income market and call it 12 times the, equity, global equity market-ish. Yeah.

Starting point is 00:59:17 It's massive. No, yeah, it's an absurdly big market, yeah, definitely. And for OTC, you know, in order also. Leastard markets, they rely on a transcripts of Patti, which is the exchange. And when institutions trade OTC trade directly in the traditional world, what they do to lower their risk, in case one of the Qunta parties gets bankrupt, in case one of the Quntart parties, you know, cannot meet its commitment, is they would enter into what is called an ISDA-ISDA agreement,

Starting point is 00:59:54 which is really, you know, a 60 to 80 page PDFs and financial institutions which we learn through the legal department and they basically, it will detail all the closings about what would happen in case, what is a credit event, what is a default, what happened, what happened in case of default, etc. And that's what made OTC markets robust in the financial world, in the traditional world. Well, is the agreement do not exist in OTC markets for Bitcoin derivatives.

Starting point is 01:00:24 Okay, so basically, people, no option if they want to trade in Bitcoin derivatives, OTCs, and to go to a trusted sub-party, to go to a central marketplace, which is at the same time, where there is at the same time, sitting in custody, which is in the end, the security hall. So what we want to do with the LLC market is create an alternative to the agreement that built for the Bitcoin world, okay, for Bitcoin derivatives. And instead of having a 60-page feed yet, all the roles of the trading are written in a smart contract, in a DLC, observable in the Bitcoin blockchain with full privacy. Unbelievable. It's unbelievable that you're taking so much administration and condensing it down.

Starting point is 01:01:09 compressing it down to something that, I mean, I'm just thinking of all the people from an administrative standpoint doing something of a $600 trillion market cap in size, annualized basis type activities, and you're compressing so much of this into something that is just way smaller from a headcount standpoint. And I think from the end user's standpoint, they're going to be just so much more satisfied. And the other part that I like about this is the fact that people can't actually see the contracts kind of removes whatever honeypot of trying to manipulate the reference sources. You lose that, right? People don't know what is necessarily or the magnitude of what's being traded based

Starting point is 01:01:57 off of whatever the Oracle is trying to find. There's just a whole lot to this. I would think that if a person was doing this a lot, like reentering a top. type of contract numerous times, that you would want to really understand what the terms and conditions of each one of those contracts were to know the reliability of the execution, right? And I wonder if that in itself is something that from a service standpoint would be valuable to market participants. Like, hey, these terms and conditions were used 10,000 times and there wasn't one person that

Starting point is 01:02:35 ever complained that the execution, the final execution of the contract had issues. Yeah, it's a very good point. It's a very good point. It's something that we could, there are some kind of standardization, market standardization that could take place in the end. That's a very good point. And when you say that it simplifies a lot of single, I think that the ethos of Bitcoin, you know, and if I come back to Bitcoin as a payment system, it's magnificent because it's so much simplifies how what a payment system is and how money should compare to the legacy system. Well, I could talk to you all day long.

Starting point is 01:03:10 I find this stuff beyond fascinating. Congrats on all the success. It's just so cool to watch what you guys have been doing. And at the pace that you're doing, it's kind of crazy to me. But remain, we'll have the link in the show notes to the white paper. We'll have a link to Ellen Markets, Twitter. We'll have a link to your Twitter. Anything else you want to highlight for people to check out other than those things?

Starting point is 01:03:37 For people interested into DLC, they can just go to dcmarkets.com and sign up for the beta that come in you soon. And I'd like to take this opportunity to thank you, Preston, for the continued support since your 2021 tweet to now. My pleasure. It has been just a pleasure to watch you guys building. I love watching builders and engineers at heart, right? It's just really exciting to see how revolutionary this stuff is compared to the legacy system. And you guys are at the tip of the spear of that activity. So, bravo to you guys.

Starting point is 01:04:13 Thank you for making time, Romaine, and this was a blast. Thanks to go driving me and have a nice day. Thanks. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it's something that helps others find the interview

Starting point is 01:04:44 in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes and courses, go to theinvestorspodcast.com. Follow us on TikTok at the investors podcast, on Instagram and LinkedIn, at the Investors Podcast Network, and X at TIP underscore Network. This show is for entertainment purposes only, before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication,

Starting point is 01:05:23 or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC168: Bitcoin Discreet Log Contracts DLC on LN Markets w/ Romain Rouphael (Bitcoin Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.